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The Seven-Year Ditch

The most obvious parallel to Europe’s current woes is the Latin American debt crisis of the 1980’s. Unfortunately, there appears to be no way for southern European debtors to avoid the seven years of misery that Latin American countries suffered before returning to economic vigor and dynamism.

PRINCETON – There are historical precedents for sovereign-debt defaults by the countries of Europe’s southern periphery, but they are not instantly attractive ones. Dealing with seemingly intractable problems often takes time. And it is difficult – especially in a democracy – to be patient.

The most obvious parallel to Europe’s current woes is the Latin American debt crisis of the 1980’s. In August 1982, Mexico threatened to default, and was quickly followed by other large borrowers, notably Argentina and Brazil. A default contagion would have brought down the banking systems of all the major industrial countries, and caused the world to relive something like the financial crisis of the Great Depression.

What followed was a seven-year play for extra time. The initial approach was to link policy improvements in the borrowing countries not only with help from international institutions, but also with additional lending from the banks – which seemed to defy the most elementary canons of sensible bank behavior.

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